How much tax will I pay on my retirement pension?

Retirement may (or may not) seem distant to you, but in any case, it is something to prepare for! Aside from administrative questions regarding pension applications and the amount of money you will receive, one of the most important questions you should ask is: “How much tax will I pay?”. Your state pension allowance is indeed subject to tax, as well as certain social security contributions. If you want to know whether you really can afford to go on holiday all year, then read on to find out how to calculate this amount.*

Retirement pension eligibility conditions

Let’s start at the beginning: in order to receive a pension, you need to have worked. Pretty straightforward, right? On a more serious note: the legal retirement age in Luxembourg is 65, provided you can prove that you’ve paid in at least 10 years of pension contributions. You don’t need to have spent the whole of this 10-year period in Luxembourg; it can be anywhere in the European Union or in a country with which Luxembourg has signed a multilateral or bilateral social security agreement.

Note that if you do not meet this condition for receiving a pension at 65, you can request a reimbursement of the contributions paid into your account, or you can continue working. Early retirement is also an option:

• • once you reach 57, if you have 480 months of mandatory contributions, which generally means you must have worked uninterrupted from the age of 17;
  • once you reach 60, if you have 480 months of contributions, whether mandatory, continued, voluntary or through retroactive payments or the purchase of additional periods, and including at least 120 months of mandatory, continued or voluntary contributions or retroactive payments.

But this is all rather technical, and doesn’t help us answer the question of how much your pension will be taxed. So let’s dive in!

State pensions are subject to health insurance and long-term care insurance contributions.

Social security charges

State pensions are subject to health insurance (deduction of 2.80% on the gross amount) and long-term care insurance contributions (deduction of 1.4% on the gross pension, after deduction of an allowance of 25% of the minimum social wage).

Tax rates and classes

State pensions are paid out by the Caisse nationale d’assurance pension (CNAP). The CNAP deducts, at source, a withholding tax and social security contributions from your pension, just as your employer did in the past. It is therefore your dedicated point of contact for any questions on this topic.

To calculate the taxable amount of your pension, the CNAP uses the information sent to it by the Direct Tax Department (Administration des Contributions Directes – ACD). It then applies the monthly pension deduction scale (depending on your tax class: 1, 1A or 2) or the average rate indicated by the ACD.

Good to know: the taxpayer in class 1 who has turned 64 at the beginning of the tax year automatically moves to class 1A, which is more advantageous.

Tax return

If you file a tax return with the tax administration, you must report the pensions granted to you by the pension fund. You will then need to complete page 8 of the declaration form: “Net income resulting from pensions or annuities”. Since a withholding tax will have already been applied, it will be credited against the amount due.

If you do not meet the conditions to file a tax return and the withholding tax is too high, you can request a tax adjustment by completing an annual statement.

If you receive a Luxembourgish pension but reside outside the Grand Duchy, the country where your pension is taxed will depend on the tax treaty established between your country of residence and Luxembourg

Attention: If you receive a Luxembourgish pension but reside outside the Grand Duchy, the country where your pension is taxed will depend on the tax treaty established between your country of residence and Luxembourg. For neighboring countries (Germany, Belgium, and France), pensions are taxable in the country that pays them.

If you file a tax declaration with the tax authorities, you must always state the pension awarded to you by the CNAP. If your employer in Luxembourg allows you to have a supplementary pension scheme (in accordance with the Law of 8 June 1999 on supplementary pension schemes), this scheme is subject to a 20% withholding tax on contributions made by your employer. As a result, payments made to you under this regime will not be taxable.

Finally, note that income from a retirement insurance contract is taxable in Luxembourg under a specific tax regime. The income can be received either as an annuity exempt at 50% or as a lump sum taxed at half the average tax rate.

In conclusion, to find out how much of your pension is taxable, you can consult your tax withholding sheet and refer to the scale applicable to pensions. You can also, more simply, use the online calculator of the Direct Contributions Administration to perform a simulation.

For more information on the subject, visit the CNAP website or go to guichet.public.lu.

* Content translated from French by the BIL GPT AI tool

This article is a part of the folder Special feature: retirement